DIGITAL TRANSACTION TAX

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• BEPS

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• Action 1: Addressing the tax challenges of the digital economy

  • Modify the existing Permanent Establishment (PE) rules to recognize significant digital presence in other countries.

  • Definition of virtual fixed place of business PE based on a company's online activities through its website hosted out of another jurisdiction.

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• Taxation Provisions

  • Imposition of final withholding tax on payments for digital goods/services from foreign e-commerce providers.

  • Equalisation levy on transactions involving non-residents conducting digital business in India.

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• Equalization Levy 1: Finance Act 2016 (Section 165)

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• Indian Taxation Amendments

  • Introduction of Chapter VIII titled "Equalisation Levy" in the Finance Act, 2016.

  • 6% levy on services received by a non-resident without a PE in India, from a resident or non-resident with a PE in India.

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• Basis of Charge

  • Applicable when non-residents provide:

    • Online advertisement

    • Digital advertising space or services

  • Charge: 6% on consideration.

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• Exclusions from Equalisation Levy:

  • Non-resident service provider with a PE in India for specified services.

  • Business-to-Consumer (B2C) transactions.

  • Small players with transactions below INR 1,00,000.

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• Collection and Recovery:

  • The payer must deduct and deposit the Equalisation Levy.

  • Service provider is not held liable for the payment.

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• Finance Act, 2018: Introduction of Significant Economic Presence (SEP).

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• Definition of Significant Economic Presence (SEP):

  • Transactions of goods/services by non-residents in India with aggregate payments exceeding a specified amount.

  • Systematic solicitation of business through digital means in India.

  • “Activities constitute SEP regardless of where agreements are made or business presence.”

  • SEP implementation was deferred to April 2021.

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• Equalization Levy 2: 2020 (Sec. 165 A)

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• Overview of Equalization Levy 2020:

  • Basic charge: 2% on consideration for services provided by non-resident e-commerce operators.

  • Charged on e-commerce supply/services.

  • Collection: To be paid quarterly by e-commerce operators.

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• Basic Charge Summary:

  • 2% Equalisation Levy on non-resident e-commerce operators.

  • Applicable on e-commerce supply or services.

  • Payments due quarterly; recovery possible from the payer in case of default.

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• Details on Equalization Levy:

  • 2% on consideration for e-commerce services targeting Indian residents or IP addresses.

  • Includes sales of advertisements or data from India.

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• Definition of E-commerce Operator:

  • A non-resident managing an online platform for sales or services.

  • "Online" refers to services accessed via the internet or digital means.

  • "E-commerce supply/services" covers a range of online transactions and activities.

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• Exclusions from E-commerce Levy:

  • If e-commerce operator has a PE in India, effective connection exempts it from levy.

  • For operators with gross receipts below INR 2 Cr.

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• Case Study I: B2C Transaction:

  • X Co. sells laptops online to Indian customers, with invoicing and payment conducted online.

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• Case Study II: B2B Transaction:

  • F Co. sells laptops to I Co. in India, online contract negotiation and payment.

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• Case Study III: B2B Offline Contract:

  • X Co. and Y Co. agree offline for laptop sales, invoicing done online.

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• Case Study: Provisions of Services I:

  • U Co. provides IT services online to I Co. under an offline contract.

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• Case Study: Provisions of Services II:

  • U Co. manages hotel bookings online with service delivery offline.

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• Facilitator (Marketplace Model) Case Study I:

  • X Co. sells UK Co.'s laptops, raising questions about EL liability and payment responsibility.

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• Facilitator (Marketplace Model) Case Study II:

  • X Co. lists UK Co. hotels. Questions arise about EL applicability and payment calculations.

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• EL, Royalty & FTS Interplay:

  • Explores conditions under which EL vs. income tax applies.

  • Exemption implications for FY 2020-21 and beyond.

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• Compatibility with International Law:

  • Reconciling Indian law with international agreements, focusing on Article 245.

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• Most Favoured Nation (MFN) Treatment:

  • Examination of if Chapter VIII treats countries equitably under trade agreements.

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• National Treatment Issues:

  • Assessing if Equalisation Levy disproportionately affects non-resident suppliers.

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• Discriminatory Definition Issues:

  • Implications of defining e-commerce operators in a way that affects non-residents adversely.

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• Arbitrariness in Procedures:

  • Discusses the lack of a proper assessment mechanism under Chapter VIII.

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• Challenges for E-commerce Operators:

  • Non-residents face burdens in determining resident status of purchasers under Indian law.

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• Order Imposition Challenges:

  • Examines the implications of the absence of a distinct order for imposing the Equalisation Levy.

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• Legal Considerations for Declarations:

  • Issues arising when customer declarations regarding residency are incorrect.

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• Impact of Incomplete Revenue Law:

  • Argument that absence of proper mechanisms could violate constitutional provisions.

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• Extra-Territoriality Concerns:

  • Investigates the legitimacy of imposing levies on purely foreign transactions.

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• Example 1:

  • Resident Indian buying pizza online in the UK raises issues about the applicability of the Equalisation Levy.

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• Example 2:

  • Indian customer searching for products in a UK search engine highlights potential Equalisation Levy implications.

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• OECD PILLAR -1:

  • Reference to global tax initiatives addressing digital economy challenges.